The Effect of Increases in Board Independence on Financial Reporting Quality and the Efforts of Independent Auditors
Keywords:
independence of the board of directors, financial reporting quality, auditors' efforts,Abstract
The purpose of this study was to investigate the effect of increasing board independence through a higher proportion of non-executive directors on financial reporting quality and the effort of independent auditors in companies listed on the Tehran Stock Exchange. This applied study adopted a quasi-experimental and ex post facto design using panel data and multivariate regression analysis. The statistical population consisted of firms listed on the Tehran Stock Exchange, and the final sample included 163 companies during the 2011–2021 period. Data were collected from audited financial statements, board reports, the CODAL system, and Rahavard Novin software. Hypotheses were tested using fixed-effects panel regression and GLS estimation. The independent variable was the proportion of non-executive directors on the board, while the dependent variables included financial reporting quality and auditor effort. Control variables included firm size, leverage, sales growth, return on assets, auditor tenure, and audit firm size. The results of the first hypothesis indicated that an increase in the proportion of non-executive directors had no significant effect on financial reporting quality (β=0.0029, p=0.7289); therefore, the first hypothesis was rejected. However, the results of the second hypothesis demonstrated that an increase in board independence had a positive and significant effect on auditor effort (β=0.4436, p=0.0764), supporting the second hypothesis at the 10% significance level. In addition, firm size and audit firm size had positive and significant effects on auditor effort, whereas leverage and sales growth showed significant negative effects. The coefficients of determination also indicated acceptable explanatory power of the estimated models. The findings suggest that merely increasing the number of non-executive directors is insufficient to improve financial reporting quality unless the governance mechanism becomes dynamic, specialized, and effective. Nevertheless, greater board independence significantly increased auditor effort, indicating stronger monitoring demand and a preference for higher-quality audit services. These results imply that board independence may indirectly enhance the quality of financial reporting by strengthening external audit oversight and increasing the intensity of audit procedures.
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Copyright (c) 2025 Hassan Hajizadeh Ardakani (Author); Ali Taghavi Moghadam (Corresponding author); Rohollah Rahmani (Author)
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.
